Through this Virtus Property Group article you can explore common mistakes rookie (and some experienced) investors make when entering the multi-family market. Crucial!
The primary issue here is, even common easily avoidable mistakes can take HUGE bites out of new investor returns. Coupled with these inexperienced losses is often going to be heightened levels of stress and frustration, which often leads to dismal downward spirals you wouldn’t wish on your worst enemy. Let’s briefly go through these mistakes one by one and dramatically alter your chances of making them.
#1: Letting Local Market Experience Overshadow Analysis
Generally speaking, yes, on the surface it seems rational – kick off your career in multi-family real estate investment properties close to home! Chances are you got involved in this wealth generation method via direct friends, family, coworkers, etc. Getting started where you’re comfortable, perhaps around the ol’stomping grounds, seems logical. You know this area, right?
- Is your locale is a buyer or seller’s market? How about last year? Next year?
- What’s the cap rate of currently listed rental properties around town?
- What’s the recent and current state of key socioeconomic indicators?
- Job Growth & Income
- Population Growth & Demographics
- Employment Rates
- Tenant Laws
The answers to those questions among others, their variables and factors, are what determine whether or not an area is ripe for multi-family rental property investment. Your first duty is to the details – market analysis, not town loyalty. Once you’re wealthy you can become a local philanthropist and raise market values!
#2: Aiming for Appreciation
Over time savvy real estate investor portfolios tend to end up as mixed bags, assortments of short, medium, and long term properties. Initially, newbies shouldn’t focus their attention on generating wealth through appreciation – in other words, buying low and hoping for growth in a market currently sporting an upward trend. There are three core challenges to this approach when feet are just getting wet:
- Multi-family rental properties tend to take much longer to appreciate – 10+ years.
- A metric TON of economic changes and unfavorable conditions can happen in a decade.
- Predicting the long-term future in any area is ultimately impossible and increases risk.
Put an emphasis on cash flow early on through sustainable income-generating properties. When the numbers don’t add up, or your analysis starts tossing red flags, don’t make the mistake of hoping appreciation will save you. Speaking of which, this blends well with our next point…
#3: Lack of Diversification Foresight
This is where we reinforce the idea that, ‘You shouldn’t gently tuck all your eggs into one basket,’ because long-haul career investors understand diversification as ‘The sum of the whole being greater than its parts.’ Meaning, if you started with a group of completely fresh investors, within a few years pack leaders would begin to shine not because of one property, or two, but the sum of their diversified portfolio of properties generating cash flow and appreciating.
- Different geographic locations widen areas of influence.
- Variant types of properties spread risk.
#4: Underestimating Tax Burdens
Depending on where your properties are located, multi-family investment can carry rather strict and complex tax burdens. Of course there’s an assortment of deductions to ease your load, but if you don’t FULLY understand them then have a professional either handle this part completely or explain them to you until you do understand. Don’t overestimate tax deductions. Always act under the assumption you’ll end up having to pay more than expected, even if you KNOW you won’t have to, and this will have profoundly positive impacts on your portfolio throughout time.
#5: Being Way Off On Costs & Expenses
In connection to tax situations are the rookie mistakes in terms of rental costs and expenses which begin stacking Day 1. Property upgrades, infrastructure and systems repairs, groundskeeping and landscaping, nicer units, adding amenities, and the list goes on. With all this $$$ flying around on paper, and all these different interests and contractors involved, it’s incredibly easy for unseasoned investors without any help to over or underestimate. Property analysis goes hand in hand with market analysis! Like two peas in a the pod-portfolio of successful multi-family investment.
#6: Neglecting Rental Rates
Whoa, your property is sitting at 95% occupancy now…wait a sec, should you raise rent and increase cash flow generation? It’s so easy…yet have you considered where current rates are relative to market rates? But, let’s say you’ve spent a year upgrading the property and such a raise on rent is both warranted and expected. When say, 5 to 8% of your renters announce they’re leaving, will your rates and livability value quickly refill those units? Oops, looks like a few other competitive properties in town at these new higher rates are sitting at 85% occupancy themselves. In this case you might consider waiting and raising rental rates when the market picks up.
Use real estate rental comps, market analysis, and other indicators to guide your judgment here, not the desire to generate more cash flow with your properties in the short term. On the other hand, losing sight of where rents should be raised can cost beginners a pretty penny.
#7: Investing with Shoe-String Margins
Being completely devoid of excess cash or capital reserves is begging for disaster in multi-family real estate investment. Vacancies, unexpected maintenance events, unforeseen accidents, and all sorts of things can go wrong. What if you have to evict multiple tenants the same month a few others move out of town and undiagnosed electrical problems start affecting two of your property’s buildings?
Is there enough reserves to handle it? If not, where does that leave you and possibly your partner investors? Generally speaking, force yourself to be incredibly uncomfortable until you have enough set aside to handle a rather large income gap or emergency. Get into habits like stashing 10% off rental cash flow each month for sticky situations.
#8: Lack of Management Help
Some people are naturally better at project management than others. If you’re gifted with complex logistics – finding and dealing with tenants, leasing issues, collecting rent, working with construction companies, landscaping companies, real estate professionals, etc. – you might be able to adequately manage one or two properties, but after that you’ll find yourself swamped. There comes a point where it’s time to work with a professional property manager or firm, and for a good percentage of rookies out there it begins in the first year.
Then it’s a matter of picking the company or individual to hire. Do your homework! Flashy websites, nice cars and expensive suits don’t necessarily mean much, because these usually mean rates will be much higher and take big bites out of rental income. Choose wisely.
We’re into Multi-Family
So, what kind of learning curve and timeline are you looking at before you know the trails of real estate investing to where you could run them blindfolded? If you’d prefer to gain access to off-market deals rather than those out in the open, you’ve got to get involved with someone’s far more experienced and well-connected network. We focus on multifamily properties, 15+ unit apartment buildings to be exact, and our advisory board commands over $100 million in apartments managed.